Top Smallcap Funds Down up to 20%

The Indian stock market performance over the last 12 months has been painful.

The Nifty 50 and Nifty Midcap 100 delivered negative returns of just 4.5% and 3.9% during the period and small-cap stocks have lagged significantly. Nifty Small-cap 100 delivered a negative return of 11.9%.

And a closer look reveals a concerning situation underneath.

As of 14 February 2025, Mint estimates that 63.8% of stocks (out of 3,894) are down 25-50% from their 52-week highs, 18.6% are down 50-80%, and 13.9% are down 10-25%.

	In 6 Months			In 12 Months
Fund Name	High Date	High Nav	Declined (%)	High Date	High Nav	Declined (%)
Nippon India Small Cap Fund	3-Nov-2025	193.61	5.27	17-Jul-2025	196.53	6.68
HSBC Small Cap Fund	19-Sep-2025	92.53	8.29	17-Jul-2025	94.9	10.57
Invesco India Smallcap Fund	29-Oct-2025	48.18	4.11	29-Oct-2025	48.18	4.11
Tata Small Cap Fund	19-Sep-2025	46.1	15.61	17-Jul-2025	47.36	17.85
Bandhan Small Cap Fund	3-Nov-25	53.06	6.49	3-Nov-25	53.06	6.49

Tracking this performance, five small-cap mutual funds have also declined by up to 20%.

Let's take a look at them...

#1 Nippon India Small Cap Fund

Nippon Smallcap Fund was launched in September 2010. The scheme is down 6.68% from its high on 17 July 2025.

The scheme's investment objective is to generate long-term capital gain by investing in equity and equity-related instruments of small-cap companies. The secondary objective is to generate consistent returns by investing in debt and money market securities.

The fund focuses on identifying good growth businesses with reasonable size, quality management, and rational valuation. The focus is also on prudent risk management, a margin of safety, and diversification across sectors and stocks.

This strategy aims to generate relatively better risk-adjusted performance over time. This scheme is suitable for investors with a high risk appetite who seek to invest in small-cap stocks with a 7+ year investment horizon.

As of 31 January 2026, the fund's AUM was Rs 658.12 bn. The scheme's expense ratio (Direct Plan) is 0.66% per annum.

The scheme's current asset allocation is 95.79% in equity, followed by cash equivalents (4.21%).

True to its mandate, small-caps accounted for 70.33% of the portfolio, followed by large-caps (15.65%) and mid-caps (14.02%). The fund holds a highly diversified portfolio of 238 stocks, with the top 10 stocks accounting for just 15.95%.

In the sectoral mix, banks accounted for 7.91% of the portfolio, followed by consumer durables (6.67%), capital markets (6.43%), auto components (6.39%), and Industrials (6.33%).

MCX has the highest weight of 3.37%, followed by HDFC Bank (2.16%), SBI (1.69%), Karur Vysya Bank (1.64%), and Axis Bank (1.24%).

The scheme's price-to-earnings multiple (PE) of 26.75 is in line with the Nifty smallcap 250 (26.15). The portfolio turnover ratio is lower at 0.14, indicating a buy-and-hold strategy with a long-term view.

Using this approach, the scheme has delivered a CAGR of 21.72% over the last 10 years, outperforming the benchmark Nifty Smallcap 250 TRI (15.34%).

The portfolio annualised standard deviation stands at 16.81, which is lower than the benchmark (19.89). This shows that the scheme is comparatively less volatile than the benchmark.

#2 HSBC Small Cap Fund

HSBC Smallcap Fund was launched in May 2014 and is down 10.57% from its high on 17 July 2025.

The fund follows a research-led investment approach focused on identifying under-researched and under-owned small-cap companies. However, it could move a portion of its assets towards fixed-income securities if the fund manager becomes negative on the Indian equity markets.

Its philosophy is anchored in fundamental research, with an emphasis on businesses that demonstrate earnings acceleration, strong execution, sound management, and healthy financials. The fund seeks a blend of profitability and valuation, aiming to accumulate quality small-cap stocks at reasonable prices.

Its proprietary three-stage process, stock selection, detailed analysis, and portfolio construction combine quantitative and qualitative filters to evaluate opportunities.

Through this framework, the fund positions itself to capture long-term earnings expansion and invest in potential large-cap leaders of tomorrow, while adhering to a defined risk matrix.

As of 31 January 2026, the fund's AUM was Rs 150.29 bn, with a direct plan expense ratio of 0.71% p.a.

The scheme's current asset allocation is 96.35% in equity, followed by cash equivalents (3.65%). Small-caps accounted for 71.03% of the portfolio, followed by large-caps (1.84%) and mid-caps (27.13%).

The fund holds a diversified portfolio of 109 stocks, with the top 10 stocks accounting for just 20.29%.

In the sectoral mix, financials accounted for 24.21% of the portfolio, followed by industrials (23.08%), consumer discretionary (13.89%), materials (11.33%), and healthcare (9.41%).

MCX has the highest weight of 3.16%, followed by Karur Vysya Bank (2.92%), eClerx Services (2.36%), The Federal Bank (2.05%), and PNB Housing (1.87%).

The scheme's PE of 28.76 is at a premium to the Nifty smallcap 250 (26.15). The portfolio turnover ratio is lower at 0.4, indicating a moderate churn strategy.

Using this approach, the scheme has delivered a CAGR of 19.43% over the last 10 years, outperforming the benchmark Nifty Smallcap 250 TRI (15.34%).

With a standard deviation of 18.77, the fund carries lower volatility than the benchmark (19.89).

#3 Invesco India Smallcap Fund

Invesco India Smallcap Fund was launched in October 2018 and is down 4.11% from its high on 31 October 2025. The fund employs a bottom-up investment approach. It maintains a bias toward growth stocks and typically follows a fully invested approach, holding a portfolio of around 40 to 65 stocks.

The overall equity investment process combines bottom-up stock categorisation with top-down analysis, and includes an ESG (Environmental, Social, Governance) overlay. The fund follows a structured framework that categorises stocks into three buckets: Growth, Value, and Event.

Under Growth, it invests in Leaders with strong industry margins, Warriors with differentiated propositions, and young companies benefiting from operating leverage (Stars).

The Value bucket includes Diamonds, where asset value can be unlocked, and Frog Princes, turnaround stories returning to growth. The Event category covers Shotguns, driven by corporate actions or restructuring, and Commodities, which ride favourable business cycles.

When selecting individual stocks, it looks for companies offering higher growth prospects at reasonable valuations, ensuring expansion does not come at an excessive price.

The fund prefers companies with distinct competitive advantages, financial strength, healthy return on capital, consistent free cash flow generation, and credible management execution.

As of 31 January 2026, the fund's AUM was Rs 90.09 bn, with a direct plan expense ratio of 0.4% p.a.

The scheme's current asset allocation is 99.4% in equity, followed by cash equivalents (0.66%). Small-caps accounted for 65.91% of the portfolio, mid-caps (22.79%), and large-caps (11.31%).

The fund holds a diversified portfolio of 64 stocks, with the top 10 stocks accounting for just 36.5%.

In portfolio allocation, healthcare accounted for 11.65% of the portfolio, followed by banks (10.59%), pharma and biotechnology (18.49%), retailing (7.92%), and finance (7.08%).

Sai Life Sciences has the highest weight of 4.58%, followed by KIIMS (4.26%), Amber (4.25%), Swiggy (4.14%), and InterGlobe Aviation (3.81%).

The scheme's PE of 36.38 is at a significant premium to the Nifty smallcap 250 (26.15).

The portfolio turnover ratio is lower at 0.53, indicating a moderate churn strategy. With a standard deviation of 16.88, the fund carries lower volatility than the benchmark (19.89).

Over the past five years, Invesco Small Cap Fund has delivered a 32.47% CAGR, ahead of the benchmark's 29.46%.

#4 Tata Small Cap Fund

Tata Smallcap Fund was launched in November 2018 and is down 17.86% from its high on 17 July 2025.

The fund identifies compounders as businesses with steady growth, low debt, and strong free cash flow. It follows a low-churn approach, holding such stocks over the medium to long term. Stock selection remains bottom-up, anchored in fundamentals and valuations.

As of 31 January 2026, the fund's AUM was Rs 107.61 bn, with a direct plan expense ratio of 0.41% p.a.

The scheme's current asset allocation is 92.87% in equity, followed by cash equivalents (7.04%). Small-caps accounted for 91.14% of the portfolio, followed by mid-caps (8.86%).

The fund holds a diversified portfolio of 63 stocks, with the top 10 stocks accounting for just 35.62%.

In the sectoral mix, capital goods accounted for 25.16% of the portfolio, followed by chemicals (9.48%), services (7.86%), consumer services (7.67%), and financial services (6.75%).

IDFC First Bank has the highest weight of 4.64%, followed by Kirloskar Pneumatic (4.45%), Usha Martin (4.32%), Sudarshan Chemical (4.09%), and Tega Industries (4.03%).

The scheme's PE of 29.44 is at a premium to the Nifty smallcap 250 (26.15). The portfolio turnover ratio is low at 0.12, indicating a buy-and-hold strategy.

Using this approach, the scheme has delivered a CAGR of 31.84% over the last 10 years, outperforming the benchmark Nifty Smallcap 250 TRI (29.46%).

With a standard deviation of 16.80, the fund carries lower volatility than the benchmark (19.89).

#5 Bandhan Small Cap Fund

Bandhan Small-cap Fund was launched in February 2020. The scheme is down 6.49% from the high of 3 November 2025.

As of 31 January 2026, the fund AUM stands at Rs 192.67 bn, with an expense ratio of 0.48%.

The fund's investment strategy is to generate long-term capital appreciation by investing in high-quality small-cap companies.

The fund allocates 78.15% to small-cap stocks, 16.55% to mid-cap stocks, and 5.3% to large-cap stocks.

The fund holds a diversified portfolio of 246 stocks. The top 10 stocks account for 19.65% of its portfolio, with Sobha (3.64%) having the highest weight, followed by REC (3.52%), LT Foods (2.39%), The South Indian Bank (2.07%), and Info Edge (1.44%).

The fund holds 12.05% of the financial sector, followed by pharma and biotechnology (7.93%), realty (7.86%), banks (7.57%), and consumer durables (4.25%).

The portfolio churn is also low at 0.22, indicating a buy-and-hold strategy. The fund has delivered a CAGR of 33.19% over the last five years, outperforming the Nifty Smallcap 250's 29.46%.

The fund exhibits lower volatility, with a standard deviation of 18.26%, compared to 19.89 of the Nifty Smallcap 250 Index.

Bottomline

The recent correction in small-cap stocks has dragged even established small-cap funds down by up to 20% from their peaks.

Yet most of these schemes continue to outperform the Nifty Smallcap 250 over three and five-year periods, backed by disciplined stock selection and controlled volatility.

That said, small-cap funds are inherently volatile, and recent drawdowns have highlighted the category's high risk profile.

Investment decisions should be aligned with an investor's financial goals, risk tolerance, and time horizon.

#Table Note: Data as of 26 February 2026
Rolling period returns are calculated using the Direct Plan-Growth option.
Returns over 1 year are compounded annually.
Standard Deviation indicates risk, while the Sharpe ratio and Sortino ratios measure risk-adjusted return.
They are calculated over 3 years, assuming a risk-free rate of 6% p.a.
The category average of all midcap mutual funds is considered.
Please note that the returns here are historical.
The funds listed at the top of the table are ranked by 5-year returns. The list of schemes is not exhaustive.
Past performance is not an indicator of future returns.
The securities quoted are for illustration only and are not recommendations.
Speak to your investment advisor for further assistance before investing.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
Source: ACE MF

Disclaimer: This write-up is for information purposes and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks. Read all scheme-related documents carefully. Registration granted by SEBI, Membership of BASL and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.